The FSA is waking up to the fact that final-salary schemes are not the safe haven they were and has made an about-turn on its pension policy.
The combined effects of pension fund accounting standard FRS17, increased longevity and poor equity returns have prompted a steady flow of closures of defined-benefit schemes by employers, changing the pension transfer environment.
The extent of the problem was highlighted this month when a report from actuaries Watson Wyatt estimated a deficit of £70bn across UK final-salary schemes.
The pension review was based on the theory that transferring out of an employer's final-salary scheme to a personal pension was almost always wrong.
But now many employees are losing their final-salary schemes. Last week saw the second one-day strike by steelworkers at the Caparo steelworks, owned by Labour peer Lord Paul, over the plan to switch existing employees from a final-salary scheme to a defined-contribution stakeholder plan.
Scottish Equitable director (pensions development) Stewart Ritchie says: “There are those who say there is no such thing as a defined-benefit scheme in this country. That may be going a bit far but it is true to say that a final-salary scheme is only as good as the company standing behind it.”
“People approaching retirement age whose final-salary schemes are closing are finding that a lot of what they thought they would get will not in fact come to them.”
Over 1,000 employees of Big Food Group, formerly Iceland, are consulting lawyers about the threat to their defined-contribution scheme.
The situation is complicated by the ranking of priority in the winding up of a scheme. The minimum funding requirement is a weak test and on wind-up can leave those who are not retired with next to nothing after those who have already retired, who rank higher in priority, have had their benefits secured.
The FSA's website carries a guide to the risks of pension transfers, in which final-salary schemes are repeatedly referred to as carrying guarantees, but now it says that consumers and advisers need to be wary of final-salary schemes.
Informed Choice director Nick Bamford says: “There is an implication from the FSA pension transfer rules that if you are in a defined-benefit scheme then you have secured benefits. We need a reappraisal of the security of defined-benefit schemes.”
The FSA has accepted that the landscape has changed but says it will not alter its documentation.
Spokeswoman Louise Buckley says: “Retrospectively, we would have said that final-salary schemes were much better than defined-contribution schemes. In the old days, final-salary schemes were better than money purchase.
“That situation has now changed. Firms are pulling out of final-salary schemes and there are shortfalls. You have to weigh these things up and take market considerations into account. But we have no plans to change the rules on pension transfers.”
This seems like a major shift in the FSA's view and has left some IFAs wondering if compensation paid to people who came out of final-salary schemes that have since been wound up is too high and needs to be looked at again.
Carrington Consultants director Mike Hodges says: “To me, this is a big U-turn by the FSA. In the past, they have said personal pensions are only appropriate in very rare circumstances.”
Syndaxi Financial Planning principal Robert Reid says: “For the FSA to say that personal pension schemes can be better than final-salary schemes is a U-turn. A lot of the old FSA notes on the subject said final-salary schemes are the best thing since sliced bread. They should adapt their consumer leaflets to reflect the changing situation.”
The change in the FSA's viewpoint underlines the difficulties that IFAs have in advising on pension transfers. The FSA will not give any guidance on how to deal with pension transfers other than telling IFAs to consider all circumstances, including the strength of the final-salary scheme.
Unfortunately for IFAs, they do not have access to all the data required to make a full assessment of the quality of a final-salary scheme.
Reid says: “You need to assess the final-salary scheme's strength but you are not entitled to all the information that is necessary to make that assessment.”
It leaves IFAs in a dilemma which the FSA is not going to help to solve.
Richard Jacobs Pension & Trustee Services director Richard Jacobs says: “The FSA will not give us any guidance but will put me out of business if I give the wrong guidance.”